Compliance with Regulatory Bodies

Compliance with Regulatory Bodies

Cryptocurrency has not had a jolly good ride in some countries and with regulatory bodies in recent times. Some climes have proven difficult, with strict laid down rules for cryptos to abide by or face sanctions. While some cryptocurrency exchanges have decided to abide by the rules and regulations, some others have decided to move to friendlier climes where the rules are suitable.

Some major cryptocurrencies like Coincheck, have fallen prey to scammers, and this has been a cause for concern for government bodies and regulatory organizations. Many countries have been very wary in the past of cryptocurrencies, with some of them not wanting the digital coin on their soil. These regulations are put down to protect investors, checkmate pump and dump schemes that pose as cryptocurrencies, and curtail theft as much as possible. This article will look at countries and regulatory bodies that have put down rules and regulations for cryptocurrency exchanges to comply with.

The Securities and Exchange Commission (United States)

In March 2018, the Securities Exchange Commission (SEC) said that platforms trading digital assets which meet the definition of a security must register with the SEC as an exchange. This means that cryptocurrency exchanges will be meted the same treatment as traditional exchanges. According to the SEC, many online trading platforms that are parading themselves as exchanges, are not regulated, and the SEC fears that these online trading platforms give investors the impression that they comply with regulatory standards and are regulatory marketplaces when they are not.

While the actions of the SEC do not go down well with some cryptocurrency exchanges, the agency has regardless stated that every online trading platform must be regulated, in order to protect investors and protect them from falling into the hands of fraudulent and manipulative traders. The agency is also willing to assist trading platforms to implement new technologies to comply with federal securities laws. At an SEC and Commodities and Futures Trading Commission (CFTC) joint Senate hearing in February 2018, Jay Clayton, the SEC chairman, promised smart and practical regulations for exchanges and investors dealing with Bitcoin and Ethereum, while Initial Coin Offerings (ICO) would face tighter regulations.

Financial Services Authority (Japan)

The Financial Services Authority (FSA) in Japan imposed five new criteria for all cryptocurrency exchanges operating in the country. The rules will apply to both existing cryptocurrency exchanges and new ones seeking to register for the first time. These five new criteria are put in place to check unregulated cryptos and protect investors from losing their money in another hack attack.

Japan used to be the friendliest country for cryptocurrency exchanges, as compared to China with the ban on ICOs, and South Korea with the threats and stringent rules. When China and South Korea became too hot for crypto exchanges, many of them moved to Japan. But with the Coincheck heist that happened in January 2018 that resulted in the loss of over $500 million, Japan has been forced to review its policies and toughen up its standards, hence, the five golden regulatory rules.

FSA’s Five-Point Criteria

Under the five-point criteria of the Japanese financial watchdog, crypto exchange operators registered with the government will face stricter standards on system management. The agency will ensure that exchanges will not store coins on online wallets and multiple passwords will have to be set for currency transfers, to prevent hacking and unauthorized transfers.

Secondly, in order to prevent money laundering, all exchanges will follow the Know Your Customer (KYC) process. Also, large crypto transfers will go through a thorough customer identification verification.

The third criterion talks about management of customer assets. The FSA will ensure that they are carefully managed separately from exchange assets. According to a Japanese news outlet, the regulatory body will require exchange operators to perform a daily check on its customers’ accounts for signs of diversion, and also require that they have rules in place to prevent their officers from unauthorized usage of clients’ digital assets.

The fourth one says that there will be new restrictions on the types of cryptocurrencies listed on exchanges. As strongly emphasized, digital currencies offering a high level of anonymity which can be easily used for money laundering will be banned.

Lastly, internal structure and operation of exchanges are dealt with here. For clarity purposes, shareholders will be separated from management. System development roles will also be separated from asset management roles to keep employees from manipulating the system for their own gain.

The tightening regulations, is, however, forcing crypto exchanges to move out of Japan as recently happened in the case of Kraken which announced the halt of its services to the residents of the country.

The Securities and Exchange Commission (Thailand)

Japan and the U.S. are not the only ones laying down rules and regulations for crypto exchanges to abide by. The Thailand SEC in June 2018, announced the details of Thailand’s regulatory framework for cryptocurrency and initial coin offerings (ICOs). This includes fees, licensing requirements, and the legalization of seven cryptocurrencies. These were approved during the SEC’s meeting on June 7 and are expected to take effect this month. According to an online news outlet, the new policies had gone through several channels of public hearings.

Prior to this, a decree making Thailand’s SEC in charge of cryptocurrency regulations was put into effect on May 14, 2018. The country also previously announced that it will tax cryptocurrency, waiving 7% value-added tax for individual cryptocurrency investors. The regulations cover crypto exchanges, ICOs, brokers, dealers, and other crypto related firms listed by the Finance Ministry. Participants are expected to receive due approval to carry out crypto business from the Finance Ministry and register with the SEC within 90 days of the effective date.

The SEC deputy secretary-general, Tipsuda Thavaramara, said that the SEC will allow seven cryptocurrencies, used for initial coin offerings (ICOs), to be traded as trading pairs. They are bitcoin, ethereum, bitcoin cash, ethereum classic, litecoin, ripple, and stellar.

Effects of Compliance Regulations on Crypto Exchanges

When cryptocurrency exchanges begin to feel “chocked” or “threatened”, they move to countries where they are more welcome. A classic example of a crypto move, was Binance, the largest cryptocurrency exchange platforms in the world, based on traded volume. On March 23, 2018, they made an announcement, stating that they were going to set up an operational base in Malta. Binance was having regulatory issues in the Asia Pacific and constantly came under scrutiny from regulatory bodies, from Japan and Hong Kong. Malta, which is an aspiring blockchain hub, was the ideal place for the exchange platform, as the country strongly believes in the value of the distributed ledger technology. Another effect of regulations on crypto exchange platforms is that it affects the price of cryptocurrencies. Instability in price, sharp nosedive in prices, and sometimes, an appreciation in price.